Interested In Cryptocurrency? Here’s All You Need To Know
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There are more than 13,506 cryptocurrencies out there, with new tokens emerging all the time. Some may disappear in a few years, while others may ultimately replace cash.
Today, cryptocurrencies include a wide range of digital assets. They are classified as follows, with examples of different types of currencies:
Store of Value Assets — Bitcoin
Payment Coins — Bitcoin Cash and Litecoin
Non-Fungible Tokens [NFTs] — Decentraland and Chiliz
Stable Coin — Dai and USDC
Smart Contract Cryptocurrencies — Ethereum and Binance Coin
DeFi Tokens — Aave and Compound
Privacy Coins — Monero and Dash
The first cryptocurrency to arrive on the scene was Bitcoin, which was the product of the first blockchain. Until 2011, it remained the only crypto investment. Then, ardent enthusiasts began to build alternative coins such as Litecoin to improve flaws supposedly noticed in Bitcoin, such as anonymity, speed, security and more.
The Foundation of Cryptocurrency
The organisation and foundation of cryptocurrencies lie in the blockchain—a disruptive technology that has facilitated several innovative applications. But when it comes to analysing the fundamentals behind a cryptocurrency, it is starkly different from any other financial asset. Conventional evaluation methods do not apply in the crypto industry, primarily because crypto data is not stored in a centralised repository.
Several cryptocurrencies in the underlying blockchain are decentralised without a central authority. Instead, participants of any given blockchain in the crypto community hold power. Since there is no centralised agency in charge, the decentralised network incentivises users to self-regulate. For instance, blockchain cryptography supports a decentralised and irreversible ledger that archives every crypto transaction without the option of erasing it, thus providing a solid defence against possible double-spending.
The Problem with Fiat Currencies
For money or fiat currency to be valuable, it needs to have several characteristics such as:
People must have it.
Businesses must accept it as a payment mode.
Society must trust its current and future value.
Payment options such as wire transfers and credit cards are slated to become obsolete.
Intermediaries such as brokers and banks make transactions expensive and slow due to their involvement and financial gain from the process.
Global financial inequality is on the rise.
Over 31 percent of unbanked and underbanked adults are unable to access financial services.
Cryptocurrencies fix some of these issues, if not more. They are digital, linear and bypass intermediaries without any central monetary authority. As a better solution than conventional fiat currencies, cryptocurrencies may provide several solutions given their decentralised nature. They could:
Reduce corruption considerably by distributing power among people or all network members.
Resolve quantitative easing through the limited amount of coins available.
Give people charge over their money and exclusive access to all their funds.
Serve the underbanked by powering digital commerce around the world.
Cryptocurrencies promise instantaneous, borderless, cost-effective, peer-to-peer transfers of actual value. In addition, they have low barriers to entry and are not subject to the business hours of financial institutions.
Investing in Cryptocurrency: Now Universally Accepted As An Asset Class
Blockchain not only makes crypto possible but also empowers a broader movement towards Decentralised Finance [DeFi], the secular force that many technologists believe is driving the dawn of digital currencies. DeFi refers to decentralised applications for saving, lending, exchange and finance. Before Bitcoin arrived, digital payments relied on centralised record keepers such as credit card companies and banks. For instance, money transfer through services such as PayPal means sending an 'IOU' depending on the back infrastructure.
When the Internet evolves to Web 3.0, decentralised blockchain technology will skyrocket, making DeFi's 's long-term investment opportunities visible to all. Some of the world's most significant DeFi projects are already generating more transaction fees than Bitcoin despite a minuscule market. For instance, digital art such as NFTs are growing in popularity, and users are becoming accustomed to the working of DeFi, further boosting the use cases for decentralised blockchain technology to expand rapidly.
Vociferous naysayers such as J.P. Morgan CEO, Jamie Dimon who had labelled Bitcoin a fraud and declared that any J.P. Morgan trader caught trading in Bitcoin would be fired, has today become one of the most active fund buyers tracking Bitcoin. Similarly, after slamming Bitcoin as a 'bubble' at the World Economic Forum in Davos, Switzerland, in January 2018, hedge fund colossus, George Soros, endorsed the cryptocurrency permitting his $26 billion family office to start buying cryptocurrencies just eight weeks later.
Gaining capital appreciation is one of the most attractive features of investing in cryptocurrency.
How to Get Started
The first step is to decide how much of your portfolio you want to allocate for investing in cryptocurrency. That’s a decision to be made based on your risk profile, as with any other asset class. Then, on determining allocation of the percentage of your portfolio to crypto, choose the currency.
Currently, the largest crypto is Bitcoin, but coming a close second is Ethereum. To buy, hold and sell crypto, you need dedicated exchanges. That’s where India’s No 1 cryptocurrency exchange, WazirX, comes in.
Some try and obtain cryptocurrency through mining, a time- and energy-intensive process involving extremely powerful computers and large amounts of processing power to develop new cryptocurrency units through complicated mathematical formulae or algorithms. But this is clearly not for the average person.
Tips for Safety
Having purchased your cryptocurrency, you need to secure it. To safeguard cryptocurrency, you can choose cold wallets that do not connect to the Internet but instead allow you to store your private keys on a hardware device.
Ensure that your passwords are never reused across your accounts to prevent hacking. Have a unique and robust password with two-factor authentication and password-rotation enabled wherever possible. It also helps to use only reputable currency wallets, exchanges, brokerages and mobile apps. Carefully research the platform security feature to understand how data will be protected. Those entities that incorporate multifactor authentication, best security practices, SSL/TLS encryption and off-line air-gapped devices can be trusted. One such entity is WazirX. You also need to be wary of fraudsters who try and hoodwink crypto investors like fraudsters do across asset classes. Here are some great tips.
How to Diversify Your Crypto Portfolio
As with every asset class, you should look at diversification in crypto investing too. Some diversification strategies you could use are:
Investing in various types of high-performing currencies ranging from privacy coins, tokens and altcoins.
Diversifying by crypto market caps.
Diversifying by crypto industry that focuses on the use cases of digital assets and assesses such application’s potential.
Diversify by crypto classification to capitalise on the explosion in demand of any cryptocurrency.
Diversify by geography, so your investments are protected from regulatory uncertainties.
Time Diversification that involves an interval-based investment plan.
Adding cryptocurrencies to your investment portfolio can essentially be a way of balancing your portfolio through diversification. Given that the cryptocurrency industry is vastly different from conventional ones, this diversification is likely to enhance the potential of maximising the worth of your portfolio.
Build a balanced crypto portfolio that’s meet the objectives driven by your financial goals, timeframe and risk appetite. As with any investment portfolio, conduct extensive research into every individual digital asset before putting together a portfolio that suits your investing personality. Adopt efficient risk management techniques and establish a dynamic approach to asset allocation. When done correctly, portfolio diversification can be an efficient risk-mitigating approach to your crypto investments.